In this post, we cover five ways you can increase how much you can borrow. Prices are high right now, so this is especially helpful for these days. Essentially, what we’re talking about is Debt-to-Income ratio (DTI) and how to lower that to your advantage. The lower your DTI the more mortgage debt you can take on. Now, in some ways, this is sort of the opposite of financial planning since we’re telling you how to take on more debt. We really only suggest doing this if, for example, you’re looking to do something like qualify for a home purchase.
This is a percentage calculated from a ratio of your monthly debt payments compared to your gross monthly income. This includes things such as utility bills, water bills, phone bills, credit card bills, car payments, student loans, private loans, etc. Banks, in general, don’t want you to have more than half your income going to debt. So, let’s get into the five ways to lower your DTI.
This is a great way to lower your debt-to-income ratio. It’s good to do this in advance, about 40 days ahead of time, since it takes some time for the credit bureaus to account for these changes.
Some debts, like cars, weigh heavily on your score because you’re taking out a certain amount of money and paying it off over a short period of time. In the case of mortgages, you have a bigger loan, but you’re paying off over a longer period of time, say 30 years. Sometimes, these payments are lower. So, what you can do is go in and pay off some of those heavier debts since they have a bigger impact on your DTI.
You can transfer your credit card debt to a card with lower interest and pay it off there. Now, we don’t want you to move around money if it’s only a small difference, say 5% interest rate to one with 2%. That’s a waste of time. In most cases though, it’s better to pay off your cards on time and in advance.
Now this one isn’t really in your control, in most cases, but it can lower your DTI. We had a borrower who needed a loan and when we got down to the end their debt-to-income ratio was too high because something popped up last minute. But they were in a position at their work where they were able to ask for a raise which positively impacted their DTI.
Now we’d never recommend this if you’re wanting to buy a car or something, but when it comes to the house this is another method you can use to lower your DTI. See, if you take out a 401k loan it will not be counted on your debt to income ratio. While we generally do not recommend that you go and get more debt, a 401k loan can be a very good tool in the short term.
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Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.BACK TO LIST